If you are a securities litigator, you have heard of the Janus Capital case by now. In that case, the United States Supreme Court took a restrictive view of securities fraud under Rule 10b-5 and held that only a person who makes a statement within the meaning of the Rule can be held liable. The Janus Capital Court held that the maker of a statement is the person or entity with authority over the statement, including its content and whether and how to communicate it. “Without control, a person or entity can merely suggest what to say, not make a statement in its own right.” Janus Capital Group v. First Derivative Traders, 131 S.Ct. 2296, 2302 (2011). The Court explained its holding by analogizing to the relationship between a speechwriter and a speaker – the speechwriter writes the drafts but the content is entirely within the control of the speaker. As a result, the Supreme Court dismissed the Section 10b and Rule 10b-5 claim against an investment advisor that drafted the allegedly fraudulent prospectus because the investment fund had the ultimate authority over the contents of the prospectus.
Recently, however, two District Courts have limited the impact of Janus Capital by holding that officers and directors could be held individually liable for statements made when acting on behalf of the corporation. In In Re Merck & Co., a case arising out of the Vioxx litigation, the United States District Court for the District of New Jersey held that an officer of Merck, who signed SEC forms and was quoted in articles and reports, could be held liable for a Rule 10b-5 claim because the officer, not the corporation, had “ultimate authority over the statement.” In Re Merck & Co., 2011 WL 3444199 (D.N.J. Aug. 8, 2011). Similarly, the District Court in Northern District of Alabama upheld liability for corporate officers on the grounds that unlike the separate legal entities in Janus, the defendants did have ultimate authority over their statements. See Local 703 v. Regions Fin. Corp., 2011 U.S. Dist. LEXIS 93873, at *2-3 (N.D. Ala. Aug. 23, 2011).
Some defense counsel may use the Janus Capital decision to argue that individual officers or directors can no longer by liable for Rule 10b-5 claims because the maker of the statements is always the corporation, not the individual officer or director. The In Re Merck Court, however, takes the exact opposite view – that the maker of the statement is the officer and/or director, and not the corporation. If that view is adopted, than perhaps the corporate entities can no longer be held liable.
We will get a clearer view of the scope of the Janus Capital decision after the lowers courts have had an opportunity to digest and analyze the decision.